2010 Half Year Trading Update

RNS Number : 7297P

Petropavlovsk PLC

22 July 2010

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN, OR INTO, THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

22 July 2010

Major New Licence Acquisitions

2010 Half Year Trading Update

Petropavlovsk PLC ("Petropavlovsk", or the "Company" or, together with its subsidiaries, the "Group") today announces new licence acquisitions and issues its trading statement in advance of its half-year results for the six months to 30 June 2010, which are expected to be published on 26 August 2010.

Highlights

New licence acquisitions

Petropavlovsk announces that it has won an auction for gold exploration and mining rights in the Amur region for an area which extends its existing licence area around the Pioneer deposit by c.420km2. The Group believes that the high grade areas of Bakhmut and Andreevskaya continue into this new licence area. 

In addition, Petropavlovsk has acquired exploration and mining rights in relation to two deposits in the Krasnoyarsk region, which brings the Group's estimated gold reserves/resources base under the Russian classification system in the Krasnoyarsk region to c.7.4Moz.

Gold production report for H1 2010

	Attributable production*
	Q2 2010	Q2 2009***	H1 ended  30 June 2010	H1 ended  30 June 2009***
Amur region	'000oz	'000oz	'000oz	'000oz
Pokrovskiy	29.6	50.9	59.4	91.7
Pioneer deposit**	54.1	54.3	89.9	118.1
Amur NE Assets	7.4	5.4	7.4	5.4
Joint ventures (attributable)
Odolgo JV and Solovyevskiy Rudnik assets	2.3	2.4	2.3	2.4
Omchak JV	7.3	7.0	7.3	7.0
TOTAL	100.7	120.0	166.3	224.6

* Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group's subsidiaries and the relevant share of production from joint ventures. The Company's direct and indirect interest in Pokrovskiy Rudnik (and any interest held by Pokrovskiy Rudnik) is 98.61%.

**During the six month period ended 30 June 2009, some of the ore from Pioneer deposit was processed through the Pokrovskiy mill, yielding production of 9,400oz. Pioneer gold processed through the Pokrovskiy mill is included in the Pioneer deposit figures. Figures for the comparative period are restated accordingly.

***Comparative numbers for H1 2009 were restated to include the share of Solovyevskiy Rudnik to be in line with H1 2010

 

Gold production update:

·; As forecasted in an announcement in March 2010, because of planned pre-stripping works at Pioneer, the production for the first half of 2010 was lower than for the same period in 2009 - the Group's attributable gold production for the first halfof 2010 was 166,300ozcompared with 224,600oz in the first half of 2009;

·; Pioneer's third production line, commissioned in April 2010, treated 21% more ore than budgeted and approximately five times more than in H1 2009. However gold production was adversely affected by a two-month delay in the delivery of the first of three 15m3 new excavators, delaying pre-stripping at the Andreevskaya high grade ore body which meant that the processed grade was 33% lower than budgeted. Remedial actions, including the engagement of a mining contractor and the complimentary provision of two 5m3 excavators, were hampered first by extreme cold and then subsequently by minor flooding;

·; Pokrovskiy's mining works concentrated on the southern wall of the main pit in order to give access to improved grades in H2 2010; ore for the Pokrovskiy mill was produced from the lower grade Pokrovka-2 pit;

·; The Group's alluvial operations and joint ventures contributed 17,000oz to total production for the first half of the year; and

·; The total 2010 annual production is likely to be at the lower end of the previously announced 670,000-760,000oz range.

 

Non-Precious metals production:

·; The processing plant at the Kuranakh titanomagnetite and ilmenite project was commissioned in May 2010 and first product sales are expected in August;

 

Exploration and development

·; Malomir is currently on track to commence production in August;

·; Further exploration results at Pioneer have indicated the potential for an increase in its JORC-classified mineral resources and ore reserves; and

·; The development of the Albyn project is currently on schedule with exploration works ongoing.

 

Gold price and costs

·; The cash cost per ounce of gold produced at Pokrovskiy and Pioneer for the first half of the year was adversely affected by the processing of lower grades, however it benefited from the increased capacity of the Pioneer plant. It is expected that with the higher grades processed in the second half of the year, the cash cost per ounce for the Group will decrease;

·; The Group's average realised gold sales price for the period was US$1,154/oz, an increase of c.26% on the same period last year;

·; Total gold sold in the 6 months to 30 June 2010 was 155,000oz at an average of $1,154/oz, compared to 210,000oz at an average of $917/oz for the six months ended 30 June 2009.

 

New licence acquisitions

Amur region

·; The Group was successful in a long awaited auction for an additional licence for exploration and mining rights in the Amur Region, adjacent to its existing licence at Pioneer. The new licence area covers c.400km2 and the Group's geologists believe that the high grade zones found at Bakhmut, Nikolaevskaya, Babaevskaya and Andreevskaya continue into this new territory;

Krasnoyarsk region

·; This is a highly prospective gold mining region in Russia and in the first half of the year the Group was successful in strengthening its position there. In addition to the promising exploration results at the Verchnetisskaya licence area already belonging to the Group, the Company was successful in acquiring exploration and mining rights for two additional deposits, Troeusovskaya and Vysokoye, with a current estimated reserves and resources base of 3.5Moz of gold and significant exploration potential. This brings the total estimate of the Group's reserves/resources base under the Russian classification system in this region to c.7.4Moz of gold. The three licence areas are located in close proximity to each other;

·; Verchnetisskaya: Active exploration works were carried out by the Group at this 50km2 licence area which is located c.65km from Polyus Gold's Olympiadinskoye deposit. Gold is evenly distributed, with grades of c.5.1-7.6g/t for a thickness of 5.0-13.7m. Gold mineralisation follows here for 700m along the strike. Initial exploration works estimated c.670,000oz of gold resources in Russian Category C2 and 3.2Moz in Russian Category P2. The identified ore bodies are open along the strike and to depth. All zones within this area are suitable for open pit mining;

·; Troeusovskaya: This new licence area is located 5-7km to the west of Verchnetisskaya. Initial geochemical works indicate highly positive results for gold mineralisation with 4 gold anomalies identified. Geochemical works, covering 25% of the licence territory, suggest the possibility of an Olympiadinskiy type of gold sulphide deposit of a 2.5Moz magnitude;

·; Vysokoye: The new 2.8km2 licence area is situated 90km south-east of the well known Blagodatnoye deposit and is located within the same geological structure. Exploration work conducted to date within the licence area estimates reserves of c.1Moz of gold at 2.0g/t with the potential for a further increase of 0.5Moz.

 

Corporate update

·; A conditional agreement was entered into with Asia Resources Fund (through a wholly-owned subsidiary), a subsidiary of General Enterprise Management Services (International) Limited and CEF Holdings, a joint venture between Canadian Imperial Bank of Commerce and Cheung Kong Holdings, for an equity investment of US$60m into the Group's non-precious metals division, valuing these assets at US$860m following the investment;

·; The Board of Directors continues to explore further strategic options for the non-precious metals division, including a possible listing on the Hong Kong Stock Exchange. As part of this exploration, a listing application form (Form A1) has been submitted to the Stock Exchange of Hong Kong Limited;

·; Good progress is being made in negotiations for the funding of Stage 1 of the K&S iron ore mining operation with Industrial and Commercial Bank of China, and Sinosure, the Chinese State Export Credit Agency, which issued a letter of intent relating to a 95% guarantee for the facility in June 2010;

·; The Company received $101,236,184 in cash as a result of the exercise of warrants to subscribe for 5,755,326 new Ordinary Shares, at $17.59 per Ordinary Share. The outstanding warrants lapsed on 9 June 2010 and were delisted on 21 July 2010;

·; Good progress was made with construction works at the K&S iron ore operation. Additional exploration work at K&S and the Garinskoye iron ore project is ongoing, with exploration work at the latter expected to confirm the presence of additional magnetic anomalies close to the main pit and, thereby increasing the size of the pit;

·; In view of the uncertainty arising from Chinalco's decision not to proceed with the proposed joint venture with the Company to produce titanium sponge, the Company had decided to make a provision of US$33.0 million against possible impairment of this investment. The economics of the project remain robust and, once the future plans are settled, the Company should be able to cancel this provision.

 

 

 

Commenting on the announcement, Peter Hambro, Chairman, said:

"The new licence acquisitions in the Krasnoyarsk region, which lie close to Polyus Gold's Olympiadinskoye deposit, are a major new step for us in a region of Russia that is relatively new to us. The acquisition of c.420km2 of additional licence areas around Pioneer is even more important because it is the realisation of a long-term plan to strengthen the Pioneer licence. We believe that the new areas contain the extension of Pioneer's high grade deposits and these, together with the expected JORC upgrades to the reserves and resources on the existing licence areas, are projected further to improve the economics of Pioneer.

"As anticipated, production for the first half of the year was lower than for the same period last year and the delayed arrival of our new 15m3 excavators was a contributory factor. Although the supplier delivered two substitute 5m3 capacity excavators, the delay still slowed down the schedule of our planned stripping works. This situation is now being resolved and, whilst taking a conservative view, I nevertheless believe that we can achieve the lower end of our forecast production range for the year. The pre-stripping that we have undertaken at Pioneer and Pioneer's enlarged processing capacity will, in part, enable us to do this and the commissioning of the new mine at Malomir is expected to supply the balance of our annual production target.

"The increase in capacity that allowed processing costs at Pioneer to be optimised, in spite of a reduced grade, are very welcome but, overall, the cash cost per ounce on a reduced number of ounces was higher than usual in the first half. We expect that the higher grades processed in the second half of the year will have a positive effect on the cash cost per ounce for the year.

"I am pleased with the successful commissioning of our ilmenite and titanomagnetite iron ore mine at Kuranakh and glad that this demonstrates our ability to build such mines in difficult terrain. As has been reported in the media, we are in the process of preparing the appropriate documentation for a potential listing of the iron ore business in Hong Kong later this year, should circumstances permit. I believe that, if implemented, it will assist in achieving the best value for shareholders and enable the iron ore business to develop to its full capability.

"I am sad that the Chinalco Titanium Sponge Joint Venture looks as if it has suffered due to our partner's change of focus elsewhere and that we will consequently make a provision against the value of the investment. The project economics remain robust and, once clarity returns, we should be able to reinstate the value."

 

Conference call

There will be a conference call today to discuss the announcement at 10:00am (London time).

 

Details to access the conference call are as follows:

The Dial-in number in the UK will be: 0800 694 0257

The Dial-in number is Russia will be: 8108 002 097 2044

The Dial-in number in the USA will be: 1866 966 9439

Elsewhere, the Dial-in number will be: +44 (0) 1452 555 566

 

The Conference ID in all cases will be: 89213853

 

Enquiries:

Petropavlovsk PLC Alya Samokhvalova  Rachel Tuft	+44 (0) 20 7201 8900
Merlin David Simonson Fiona Crosswell	+44 (0)20 7726 8400

 

Pokrovskiy

Mining

During H1 2010, the main focus of the mining operations was further stripping of the southern wall of the main pit in preparation for mining works on its main ore body in the second half of the year. Because of this, the Pokrovskiy plant treated lower grade material from the Pokrovka 2 pit, in particular the Olegovskoye ore body, which was discovered as a result of detailed exploration works at the deposit at the end of last year. It is expected that mining works during the second half of the year will move to the main pit producing 3.0 - 3.5 g/t material for Pokrovskiy mill.

Pokrovskiy Mining Operations
	Units	Q2 2010	Q2 2009	H1 ended 30 June 2010	H1 ended 30 June 2009
Total Material Moved	m³ ‘000	1602	1397	2828	2641
Ore mined	t ‘000	391	495	795	972
Average grade	g/t	2.0	3.3	2.2	2.8
Gold content	oz ‘000	25.7	52.1	55.7	87.5

  

Processing

The Pokrovskiy RIP plant operated steadily in H1 2010 processing 873,000t atan average grade of 2.3g/t with recovery rates c.84%. The heap leach operations started to produce gold in May and 4,500oz were recovered during the period.

Pokrovskiy Processing Operations
	Units	Q2 2010	Q2 2009	H1 ended 30 June 2010	H1 ended 30 June 2009
Resin in Pulp Plant
Total milled	t ‘000	428	443	873	870
Average grade	g/t	2.2	4.2	2.3	4.2
Gold content	oz ‘000	30.0	60.5	65.2	116.2
Recovery rate	%	83.7	81.5	84.2	83.9
Gold recovered	oz ‘000	25.1	49.3	54.9	97.5
Heap Leach
Ore stacked	t ‘000	337	311	337	311
Average grade	g/t	0.9	0.8	0.9	0.8
Gold content	oz ‘000	9.0	8.0	9.0	8.0
Recovery rate	%	49.2	81.4%	49.2	44.0
Gold recovered	oz ‘000	4.5	1.6	4.5	3.6
Total
Gold recovered	oz ‘000	29.6	50.9	59.4	101.1
including
Pokrovskiy	oz ‘000	29.6	50.9	59.4	91.7
Pioneer	oz ‘000	0.0	0.0	0.0	9.4

 

  

Pioneer

Mining

As planned, and as previously announced to our shareholders, the focus of mining works at Pioneer in H1 2010 was on the pre-stripping of waste at two main high grade ore bodies: Andreevskaya and north-east Bakhmut. In order to fulfil this in a timely fashion and to meet the demand for ore from Pioneer's newly commissioned third production line, three 15m3 excavators were ordered. The first of these machines was due to be delivered at the end of April but only arrived at the end of June. This late delivery, for which the supplier and its delivery company take responsibility, caused a delay in the stripping works and resulted in c.33% reduction in grades of ore delivered to the mill (2 g/t versus the budgeted 3 g/t).

 

The challenging schedule of mining works, which included the engagement of a mining contractor in order to mitigate the problems caused by the delivery delay, was also adversely affected by extreme cold weather and subsequent minor flooding.

 

Remedial measures to ensure the delivery of the budgeted production levels include the supply of two further 5m3 excavators on a complimentary 7-month lease basis and an acquisition by the Company of an increased number of dump trucks to help increase production levels.

 

 

Pioneer Mining Operations
	Units	Q2 2010	Q2 2009	H1 ended 30 June 2010	H1 ended 30 June 2009
Total Material Moved	m3 '000	4879	2177	7707	3503
Ore Mined	t '000	864	266	1706	399
Grade	g/t	2.1	7.2	2.1	10.1
Gold	oz '000	57.6	61.4	117.4	129.0

 

 

Processing

In April this year, an additional third production line at Pioneer was successfully commissioned, achieving designed production capacity in May. The two new milling lines have a current combined total capacity of 180,000-210,000t per month, depending on the ore quality.

 

Slightly lower recovery rates during H1 2010 were due to the introduction into the blending mix for the mill of new types of ore from the north-east Bakhmut area which has slightly lower recoverability characteristics compared to Andreevskaya ore. The introduction of Andreevskaya ore in the second half of the year is expected to significantly improve recovery rates which are expected to average 90% for the year. The steady processing achieved by the Pioneer plant reinforces management's belief that the mine will reach its production targets for the year.

 

The first heap-leaching operations were commissioned at Pioneer at the end of H1 2010 allowing for the processing of lower grade ore (ore with an average gold content of 0.7g/t). This year, it is planned that 300,000t of ore from the newly discovered Vostochnaya deposit will be processed using this technology.

Pioneer Processing Operations
	Units	Q2 2010	Q2 2009	H1 ended 30 June 2010	H1 ended 30 June 2009
Resin in Pulp Plant
Total milled	t ‘000	1011	163	1661	321
Average grade	g/t	2.0	11.1	2.0	11.3
Gold content	oz ‘000	64.2	58.4	107.2	116.6
Recovery rate	%	84.3	93.0	83.8	93.2
Gold Recovered	oz ‘000	54.1	54.3	89.9	108.7
Heap Leach
Ore stacked	t ‘000	22		22
Average grade	g/t	0.7		0.7
Gold content	oz ‘000	1.0		1.0
Recovery rate	%	n/a		n/a
Gold recovered	oz ‘000	0.0		0.0
Total
Gold recovered	oz ‘000	54.1	54.3	89.9	108.7

  

Alluvial Production

The Group's alluvial mining operations, OAO ZDP Koboldo, OOO Tokurskiy Rudnik and OOO Zeyazoloto produced c.7,400 oz of gold production attributable to the Group in the first half of the year, which was a c.37% increase on the same period in 2009. Extensive exploration was carried out at new sites with the results indicating the potential to add to current gold reserves.

 

Joint Ventures

 

Omchak Joint Venture

Omchak produced c.14,700oz of gold in the first half of 2009, in line with expectations. The Company's attributable share of production was c.7,300oz. Omchak also carried out exploration at three projects in the Chita Region in accordance with approved plans and licence conditions.

 

Odolgo Joint Venture and Solovyevskiy Rudnik assets

In the first half of 2010, the share of attributable production from Odolgo Joint Venture and the Solovyevskiy Rudnik assets amounted to 2,300oz of gold.

 

Malomir

Mining

Mining and stripping works at the Quarzitovoye deposit continue as scheduled and are expected to meet targets.

 

Processing

Plant construction continues as scheduled with all major equipment being at the final stage of assembling. Engineering pipelines are being installed with the electric systems almost completed. The construction of the tailings dam is being finalised.

From our experience of building the Pioneer plant, we expect the mine to be commissioned in August 2010.

 

Albyn

During H1 2010, work at Albyn was focused on the construction of the accommodation camp and the power line. The main equipment for the plan has been ordered and the orders for the mining fleet are being finalised. Further exploration work on sites deemed to be highly prospective is ongoing.

Kuranakh

Following the successful commissioning of Kuranakh's processing plant in May 2010, the plant's primary ball mill and spiral classifier have been working at full capacity on low grade ore and waste in order to test the equipment and provide a base lining for the tailings dam. The first ilmenite and magnetite concentrates were produced in June 2010 and the first sales of the final product are forecasted for August. Photos of the equipment in operation can be viewed on the Company's website, www.petropavlovsk.net. Russian President Dmitry Medvedev participated in the formal inauguration.

During H1 2010, mining operations continued with the development of the Saikta open pit. Mining operations at Saikta concentrated on bench development on the 740-680m elevations with ore being mined mainly from the 720m elevation. Construction of a new haul road to the Kuranakh open pit also commenced during the period.

The total amount of overburden moved in H1 2010 was 982,000m3 and the total amount of ore mined was 83,000t. The Kuranakh crushing and screening plant recommenced production of pre-concentrate in March 2010 and processed 139,000t of ore in H1 producing 66,000t of pre-concentrate with a grade of 43.7%Fe. As at 30 June 2010, 63,900t of ore and 53,900t of pre-concentrate were stockpiled at the Kuranakh crushing and screening plant and the Olekma processing plant.

 

During the period, the fleet of 40t capacity articulated mining trucks was replaced by a fleet of 155t capacity rigid mining trucks. The articulated trucks are now being used to construct the new 4.5km haul road from the crushing and screening plant to the Kuranakh open pit. It is intended that during H2 2010, the EKG rope shovels will be replaced by two hydraulic shovels and one front end loader in order to achieve the full mining rate of 2.6Mt of ore per annum.

Two further accommodation blocks, one for female staff and the other for engineers and technicians were completed in H1 2010 as was the laboratory and the medical centre. The light vehicle maintenance garage is still under construction.

 

K&S/Garinskoye

A significant amount of construction work took place at the K&S site during the first half of 2010, including completion of the administrative building and the first dormitory block and progress with the main haul road from the process plant to the Kimkan central pit. Clearance of the site for future construction was also undertaken, focussing on clearance of the Kimkan central pit area and the site of the processing plant. Exploration works also continued during the period, focussing on the Kimkan area and the northern and southern sections of the Sutara area.

In January 2010, the State Geological Committee approved the plan for additional geological exploration work at Garinskoye. This work is expected to confirm the presence of additional magnetic anomalies close to the main pit thereby increasing the size of the pit.

 

Chinalco Joint Venture

As a result of the acquisition of Aricom plc in April 2009, the Group is a partner in a joint venture with Aluminium Corporation of China ("Chinalco") that was intended to make use of Ukrainian technology to produce titanium sponge from the Group's ilmenite production from Kuranakh. To date, the Group has invested approximately US$21m in the joint venture, and a further US$16m in the titanium sponge processing technology, which was expected to be recharged to the joint venture.

The Group has now learnt from its partner, Chinalco, that it has decided to withdraw from some such non-core ventures and no longer wishes to proceed with the project. As a consequence, the building of the plant has been deferred and thus there is uncertainty as to the eventual outcome of the joint venture activities and the recoverability of the amounts invested to date.

The Directors believe that the economics of the project remain robust and accordingly the Company is reviewing its options. One route might be to continue with the project alone and another to accept a different joint venture partner.

As a result, the Directors have concluded that, particularly in light of the possible listing on the Hong Kong Stock Exchange referred to above the level of uncertainty calls for the Company to make a provision of US$33m against its investment in the joint venture.

 

Presidential Visit

In July 2010 the Russian President, Dmitry Medvedev, honoured Petropavlovsk with a visit to its metallurgical test plant in Blagoveschensk, Amur Region. During his visit the President took part in a ceremony via video conference to celebrate the launch of the new Kuranakh iron ore processing facility and the third processing line at Pioneer.

 

 

The material set forth herein is for informational purposes only and does not constitute an offer of securities for sale in the United States or any other jurisdiction. The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), or the laws of any state, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state laws. No public offering of securities will be made in the United States.

 

Forward-looking statements

 

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, political and economic uncertainty. Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

 

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